Ask Colin

Do you use automatic stop losses?

The detailed question was:

My wife and I are at present applying the strategies set out in your book Building Wealth in the Stock Market and are wondering if you would mind clarifying for us whether you use automatic stop losses.

We buy and sell shares through CommSec and they have a facility called a “falling Sell trigger”. We are setting our stop loss as described in your book at 2% below the low. However we are wondering whether we should manage these manually by following each stock individually at the end of the day or whether we should have these automatic falling sell triggers in place. Our concern is with the current volatility in the market that our sell trigger will be activated and stocks sold and then the market could continue upwards. Really would appreciate your thoughts on this strategy.

The second most common subject I field questions on is stops. There are 57 questions and answers for Stops on the Ask Colin page on my website, that I think answer most of your points already. Have you reviewed them? I have made clear there that I do not use automatic stops and why. That is not to say I might not consider them if I was travelling somewhere in the world where I did not have reliable internet coverage, but I have never needed to do so. Before automatic stops in Australia, I used different methods when I was trekking in Nepal and there was zero internet. Last year, I travelled for three weeks in South America. There was internet most places, but I did not bother because I was on holiday. When I got back, only one stock had violated its stops and I then sold it.

As an aside, this is fine for an investor, but if I was a trader, I would always sell everything before I went away for a holiday. That is what holidays are for – to turn off work for a while.

You should also note that my book is only my plan. I have since modified the stops area of my plan somewhat and published a detailed paper on that change on the Investment Plan Changes page on my members website. On the members website I also take you through my journals for every stock I own, teaching by real examples how I think in implementing the plan.

I would stress here that stocks are not all the same and no matter what my tactics might be with respect to stops, there is always a need to tailor the approach to the specific situation.

At to what you should do, I cannot legally advise you. I am not a licenced investment adviser. I want to teach people to make their own decisions and that includes developing an investment plan that suits them. Copying my plan blindly will tend to lead to failure because you are not me (objectives, capital, knowledge, experience, skills, risk tolerance, personality etc) and have not done the deep thinking that leads to unshakeable faith in your approach under pressure in the market. This concept of devising your own investment plan is fundamental to my teaching.

So, on the questions, about what you should do, consider what I do in my plan, but more importantly the reasoning behind it. Then fashion your approach to fit your objectives, capital, knowledge, experience, skills, risk tolerance, personality etc.

I hope these thoughts are useful and remember there is far more on my website.